The IMF explodes the myth of fiscal "credibility"

There is a huge amount of interesting material in the full IMF staff report on the UK, released today, in particular the lasting damage ("hysteresis" to economists) done by this prolonged period of very low growth.  But in this post I wanted to draw attention to one particular paragraph (it is para 43 on page 38).   I reproduce it here in full: 

Some further slowing of consolidation is unlikely to trigger major market turmoil

43. Further slowing consolidation would likely entail the government reneging on its net debt mandate. Would this trigger an adverse market reaction? Such hypotheticals are impossible to answer definitively, but there is little evidence that it would. In particular, fiscal indicators such as deficit and debt levels appear to be weakly related to government bond yields for advanced economies with monetary independence. Though such simple relationships are only suggestive, they indicate that a moderate increase in the UK’s debt-to-GDP ratio may have small effects on UK sovereign risk premia (though a slower pace of fiscal tightening may increase yields through expectations of higher near-term growth and tighter monetary policy).  This conclusion is further supported by the absence of a market response to the easing of the pace of structural adjustment in the 2011 Autumn Statement. Bond yields in the US and UK during the Great  Recession have also correlated positively with equity price movements, indicating that bond yields have been driven more by growth expectations than fears of a sovereign crisis.

The Supporter's Fear of the Penalty Kick

Guest post by Alex Bryson, Senior Research Fellow, NIESR

 Like Marmite you either love it or hate it: the penalty shoot-out. Either way it is clear - we are not very good at them. Using data from http://www.penaltyshootouts.co.uk/countries.html on 95 national teams for 367 shoot-outs (including double-counting of head-to-heads) we find England is ranked 77th in terms of percent of shoot-outs won.  The only teams who are below England are countries that have never won a penalty shoot out. Figure 1 shows the win rates for all countries with at least one win. England has won just one of six, a 17% success rate. Sixteen countries have a 100% record, but 11 of these have only ever been in one shoot-out.  The shoot-out kings are Angola: they have won all four of their penalty shoot-outs.

"We've got the deficit down by a quarter": if this is success...

The first achievement highlighted today by the Prime Minister in his Sunday Times article was deficit reduction:

"We’ve got the deficit down by a quarter already"

This statement is true. But what the Prime Minister didn't say was that the economic outlook the Prime Minister inherited was for precisely this pace of deficit reduction; that's exactly what the Office of Budget Responsibility was forecasting on the basis of policies in place in May 2010.

Explaining the benefit system to John Humphrys..

I was on the Today programme this morning to discuss a report, written by Howard Reed of Landman Economics for a group of childrens' charities, called "In the Eye of the Storm", about the impact of tax and spending change on "vulnerable children and families".

John Humphrys began by asking me what the report showed. I said that it showed that, not surprisingly, tax rises and benefit cuts, combined with cuts to public services, were likely to disproportionately affect the poorest.    I expected - evidently naively - that to be a prelude to a more detailed discussion of the analysis in the report and the implications. We never got to the report itself; instead, Humphrydd asked:

“surely it isn't the case that benefits are being cut for the poorest? There are benefit cuts yes, but mostly they’re caps on the higher limits, on the top limits”

You can listen to it all (only three minutes) here. [begins at 2h 57min].  It is clear that Humphries really is under the impression that cuts to welfare benefits will not impact the poorest or genuinely disabled people.

Full circle on policy? Let's hope so.

[This article appeared first in Public Finance]


The G-20 has come full circle.  In April 2009 in London the talk was of a massive coordinated fiscal stimulus. While this was considerably exaggerated - much of the "trillion dollar package" has already been announced - there was a genuine collective determination to do what was necessary to ensure the financial crisis did not become a prolonged depression.

The LIBOR scandal and reforming the banking sector

[By Angus Armstrong, Director, Macroeconomic Research, NIESR]

The damage to the City of London of the revelations of manipulation in the London interbank market cannot be overestimated. The City is the global centre of foreign exchange trading (37% of global turnover), the home of the money markets and half of the $650 trillion global over-the-counter derivatives market.[1] The London Interbank Offer Rate (LIBOR) is the benchmark interest rate on which these transactions are priced, as well corporate loans and even mortgages. According to the IMF’s Article IV Spillover Report the UK's dominance in finance is reinforced by its "robust" market infrastructure, including the setting of LIBOR - the global benchmark interest rate.

easyMoney could save the eurozone

[This article is joint with Declan Gaffney, who blogs (mostly on welfare and benefit related issues here; it was prompted by a twitter conversation with Sue Marsh, also a prolific blogger on disability issues. After writing it, we became aware of this FT article by James Mackintosh, who obviously thought of the basic idea first, but having written it we thought it was worth posting, and it makes some additional points]. 

A few weeks ago it was reported that a group of holidaymaking Germans in a Cretan bar refused to pay their bill on the grounds that it was "their money". Unsurprisingly, a fight broke out.  This microcosm of the political and economic troubles of the eurozone is revealing - because both sides had a point.  More optimistically, it points to a possible solution to the fundamental problems of the eurozone that could benefit all sides.